ECB won't pull the plug on funds for Greek banks

The European Central Bank (ECB) is unlikely to pull the plug on emergency funding for Greek banks this week despite a standoff between Athens and its international lenders, a person familiar with the situation said.

The European Central Bank (ECB) is unlikely to pull the plug on emergency funding for Greek banks this week despite a standoff between Athens and its international lenders, a person familiar with the situation said.

The ECB's Governing Council is due to meet tomorrow and will review the provision of so-called Emergency Liquidity Assistance (ELA) to Greek banks, as Greece is at loggerheads with Eurozone governments over the future of its international bailout, which expires at the end of this month.

Provision of the ELA funding is essential to the survival of Greece's banking sector, and hence to the country's continued membership in the Eurozone.

The ECB stopped accepting Greek bonds as collateral for funding on February 5, shifting the burden of financing its lenders via ELA to Greece's central bank. However, the ECB retains control over that ELA funding, which is subject to tight conditions.

The rules stipulate that national central banks can only grant such funding temporarily and to solvent banks.

"There is no sudden end of ELA expected this week," the person familiar with the situation said.

The ECB raised the cap on ELA for Greek banks by about €5bn to €65bn last week, Greek central bank and government officials told Reuters.

The ECB added money because deposit outflows had picked up and to ensure Greek banks have liquidity while tense talks take place in Brussels, Greek banking sources said on Friday.

One source said recent daily outflows were in the region of €300m to €500m on average.

ECB Executive Board member Peter Praet said last week that ELA is "only for very short needs" and stressed the rules on provision to solvent banks should be applied.

Bundesbank chief Jens Weidmann has called for "strict standards with ELA".

Taking a strict approach would leave the ECB in an awkward position if Greece failed to agree an extended, or new, bailout programme this week but nonetheless remained in the Eurozone. Greece's existing programme runs out on February 28.

Offering a carrot to Greece's leftist government, Austrian central bank chief Ewald Nowotny also signalled last week that if it signed up to a reform programme, the ECB could replace this emergency funding with cheaper direct ECB finance. (Reuters)